Expert Speak Terra Nova
Published on Apr 26, 2023
The significant gap in fiscally integrating climate change concerns within national spending needs to be addressed
Climate budgeting: Unlocking the potential of India's fiscal policies for climate action There has been a growing acknowledgement of the physical and transitional risks posed by climate change, as a range of biophysical risks are already impacting the society and economy. India requires approximately US$ 2.5 trillion by 2030 to meet its Nationally Determined Contributions (NDCs) and US$ 10.1 trillion to meet its net-zero targets by 2070. Existing climate finance aggregates are deemed insufficient to meet the current climate targets and will need to be scaled up using public, private, and international finance. The recently released Union Budget for the fiscal year 2022-23 was touted as a ‘Climate Budget’, designed with an aim to enhance climate-resilient development and provide a pathway to achieve global and national climate targets. It also underscored the importance of the energy transition and sustainable development. Despite this inspiring focus, there exists a significant gap in fiscally integrating climate change concerns within national spending. Public expenditure constitutes a significant proportion of economic activity and, thus, government spending decisions have social, environmental, and economic ramifications for a country.
Public expenditure constitutes a significant proportion of economic activity and, thus, government spending decisions have social, environmental, and economic ramifications for a country.
India has been persistently acknowledging the significance of incorporating climate change considerations into the planning and administration of domestic public finances, particularly in the realm of fiscal management. Even though climate finance in India is disbursed by both public and private sources, public sources account for a majority of the spending. The major source of adaptation funding comes domestically (94  percent) and is fully funded by the central and state budgets. Public expenditure also serves as a catalyst in mobilising private finance for climate action. Since the Union Budget is an essential policy document that reflects the government’s accountability, commitments, and priorities, making budgets climate-responsive is the need of the hour.

What is climate budgeting? 

Climate budgeting enables the identification, classification, and categorisation of expenditures that are pertinent to climate change within the scope of a government's budgetary structure. This mechanism allows precise estimation, diligent monitoring, and methodical tracking of such expenses. The growing prominence of climate budgeting can be traced back to the formation of the ‘Paris Collaborative on Green Budgeting,’ which was a country-wide initiative announced at the One Planet Summit in Paris in 2017. It aimed at mainstreaming green growth within budgetary frameworks. Subsequently, in 2019, the ‘Coalition of Finance Ministers for Climate Action’ was formed, which highlighted the importance of collective action by the world’s finance ministers to address the challenges posed by climate change. Furthermore, finance ministers from over 70 countries were also signatories to the ‘Helsinki Principles,’ which were designed to foster climate action through fiscal policies and public finance.

Why do we need climate budgeting?

Accountability and transparency in climate financing are now globally mandated and are national priorities. It is now essential to ensure that public finance management systems integrate climate change concerns, ensuring governmental accountability for climate finance. In this decade of climate action, we are now transitioning towards an Enhanced Transparency Framework (ETF), which encourages developing countries like India to provide information regarding the financial contribution towards its national climate targets and goals via Biennial Transparency Reports (BTR) to the UNFCCC. Climate budgeting will be a step in the right direction towards the country’s wider efforts on improving transparency and accountability of domestic climate finance. It will further assist in meeting the reporting requirements more effectively and efficiently. Furthermore, climate tagging of the budget will also provide data regarding climate investments that cannot be acquired with the usual budget classification exercise. This relevant data can further contribute towards strengthening the frameworks of climate finance instruments like green bonds by identifying the eligible projects, and tracking finances and reporting.
Climate budgeting enables the identification, classification, and categorisation of expenditures that are pertinent to climate change within the scope of a government's budgetary structure.
Climate budgeting can also aid in estimating the climate finance gap by providing evidence of existing climate expenditures. For example, climate budgeting was used as an essential tool by the Indonesian government to analyse the gap between the current public expenditure and the estimated cost of climate mitigation measures. This further helped them in making a case for promoting innovative financial models for mobilising climate finance. As the increased frequency of extreme weather events continues to unevenly burden the marginalised and vulnerable populations, the government needs to be fiscally stable to absorb these shocks. At the sub-national level, quantifying the level of investments required to curb sector-wide emissions can aid in prioritising climate actions and can lead to robust policy-making. For instance, the information acquired from climate budgeting can feed into the State Action Plans on Climate Change (SAPCC), which will further formulate modalities to manage climate-related financial flows in an efficient and transparent manner.

What are the policy gaps?

India currently does not have specific directives, guidelines or framework to allocate a budget for climate change interventions. The lack of a common framework, thus, impedes the reporting of climate action, making it difficult to monitor and track public expenditure related to climate change interventions. The National Action Plan on Climate Change and the State Action Plan on Climate Change entail a list of strategies and interventions for climate adaptation and mitigation at the national and state levels, respectively. However, there is no separate budget allocation provided for financing these SAPCC interventions in the Detailed Demand for Grants (DDFGs) documents of the state. Additionally, certain development projects that provide significant climate adaptation and mitigation co-benefits remain underreported as explicit expenditures towards climate change concerns. For instance, there are many development programmes such as the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) that are aimed at conserving water and have climate change significance, however, they are not classified as outlays towards climate adaptation or mitigation. Hence, there is an urgent need to enable the state governments to assess the climate relevance of funds spent on development programmes.
Climate budgeting was used as an essential tool by the Indonesian government to analyse the gap between the current public expenditure and the estimated cost of climate mitigation measures.

Best practices at the global, national, and sub-national levels

Given the increasing demand for climate change adaptation and mitigation measures, a rising number of countries are deploying climate budgeting as an instrumental technique for methodically integrating climate-related expenditures within their existing budgetary systems. Countries like Bangladesh, Ghana, Indonesia, Kenya, Nepal, Pakistan, and the Philippines have set an example in mainstreaming climate change into their public financial management systems. The Government of Bangladesh released its first-ever Climate Citizen Budget in 2018 and presented its annual climate budget report to the Parliament. Climate budgets and expenditure for adaptation and mitigation are also provided in Pakistan Economy Survey and the summary of relevant data is also a part of the annual budget documents. Despite the lack of a holistic institutional review of public expenditure at the national level, several Indian states have also taken the initiative to incorporate climate budgeting in their public finance management systems. Maharashtra, Assam, Chhattisgarh, Bihar, Odisha, and Kerela have done a budget coding exercise to track the climate relevance of their development projects. Odisha, in fact, became the first Indian state to publicly disclose the budgetary needs of every sector and recognise the importance of highlighting climate sensitivity of the state budget. The state adopted the State Action Plan Financing Framework (SAPFIN) to assess the climate relevance of its developmental programmes and schemes. Additionally, some state governments are also using the United Nations Development Programme’s Climate Public Expenditure and Institutional Review (CPEIR) methodology to assess their climate-related expenditures.
Certain development projects that provide significant climate adaptation and mitigation co-benefits remain underreported as explicit expenditures towards climate change concerns.

Way forward

Mainstreaming climate change within the development agenda requires an all-inclusive strategy driven by national priorities. This necessitates the formulation of a common budgetary framework to integrate climate finance into the larger public finance management system. Despite significant efforts from the states to transform their public finance management systems, the current structure of the Union Budget needs to be revamped to accommodate robust reporting of climate-related expenditures. India has already spent the better part of the decade building capacities for gender budgeting at the national and state levels. The government has already initiated the gender budget statement, tribal sub plan statement, child budget statement, and Schedule Caste budget statement, however, the implementation has been poor due to a lack of effective reporting mechanisms. An integrated and robust reporting, monitoring, and verification framework that provides methodologies for estimating the climate finance needs will be required to initiate inter-sectoral efforts for mobilising climate finance. Furthermore, institutionalisation of climate budgeting requires interdepartmental coordination and clarity of roles and responsibilities of various line departments across government at the national as well as sub-national levels. Thus, training and capacity building are essential to integrate the climate budget tagging into the annual budget process. It is also essential to expand the definition of climate budgeting to allow the inclusion of development programmes that address climate change concerns, despite the lack of an explicit mandate in their programme objectives.
Despite significant efforts from the states to transform their public finance management systems, the current structure of the Union Budget needs to be revamped to accommodate robust reporting of climate-related expenditures.
Fiscal policies constitute an integral part of the government’s roadmap to combat climate change. These policies need to be strengthened by integrating a climate perspective into India’s public finance management system and guidelines, especially the Union Budget. There is a clear strategic imperative to know the implications of India’s budget expenditures from a more sophisticated lens, and climate budgeting can be a pragmatic approach to further enable transparency and increase accountability of domestic climate finance.
Gopalika Arora is an Associate Fellow at the Centre for Economy and Growth, Observer Research Foundation.
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